Lessons from Australia’s ‘weaponisation’ of its income tax general anti-avoidance rules

October 2025  |  SPECIAL REPORT: CORPORATE TAX

Financier Worldwide Magazine

October 2025 Issue

No matter what country a company is tax resident in, it is worth reflecting on Australia’s 45-year journey in ‘weaponising’ its income tax general anti-avoidance rules (GAARs), as this could provide insight into the approach other jurisdictions may take in the future.

Prior to 1981, Australia’s GAAR was contained in section 260 of the Australian Tax Act. Litigation over the years uncovered major limitations with this provision’s operation, and it was not seen as effective in preventing tax avoidance schemes. A new GAAR to apply to schemes entered for the purpose of obtaining a tax benefit (contained in part IVA of the Australian Tax Act) was introduced to replace section 260 in 1981.

In unveiling the new GAAR (which became known and referred to generally as part IVA), the Australian treasurer pronounced that it would be effective against blatant, artificial or contrived tax avoidance arrangements and not disturb arrangements of a normal business or family kind, including those of a tax planning nature.

For a time, it appeared that Australia’s tax administrator, the Australian Taxation Office (ATO), had heeded the treasurer’s words, as there was little evidence of part IVA being applied to tax avoidance arrangements that could not properly be described as blatant, artificial or contrived.

The decisions of Australia’s apex High Court on part IVA have remained true to the intention expressed by the treasurer. However, the evolution of the ATO’s administration of part IVA and the Australian government’s enactment of changes to the part as well as the addition of new GAARs over the ensuing 45 years has been concerning.

Several cases involving the substantive application of part IVA made their way through Australia’s court system to be decided by the High Court between 1996 and 2004. In those cases, the ATO’s counsel (the ATO’s representatives and advocates in the court proceedings) had what the authors would say was proper regard to the original intended scope of part IVA.

In their submissions to the court, they said that what was to be looked for was indicia of a dominant purpose of seeking a tax benefit, and this would be found where what was done was blatant, artificial or contrived. This appeared to be a commonsense approach to limiting (appropriately) the scope of part IVA.

The ATO’s counsel contended (successfully) that for part IVA to apply there needed to be steps in the scheme explicable only by reference to a purpose of obtaining a tax benefit. Furthermore, those steps needed to be sufficiently significant to justify the conclusion being reached that the main purpose of a person or persons entering the scheme was to enable the taxpayer to obtain the tax benefit.

It would be appropriate for the ATO to administer part IVA in accordance with the approach taken by the ATO’s counsel in the High Court cases. Unfortunately, the experience on the ground has been different. The potential application of part IVA has become a regular feature of ATO case theories postulated and tested during audits and other risk assessment enquiries.

Many of the arrangements and transactions in these cases are what taxpayers and their advisers would view as arrangements of a normal business or family kind and not blatant, artificial or contrived tax avoidance. Consequently, there have been (and continue to be) a significant number of part IVA disputes, some of which end up being resolved by litigation.

That litigation included a string of cases in the early 2010s in the Federal Court (the Australian Commonwealth court, which routinely hears income tax appeals) in which taxpayers successfully argued that part IVA could not apply to their arrangement because there was no “tax benefit” under the statutory definition.

Unfortunately for corporate taxpayers, this coincided with increased global focus on tax systems and the tax affairs of multinational enterprises (MNEs). In that context, the Australian government legislated changes to part IVA, including measures to defeat the taxpayer arguments that had been successful in the Federal Court.

Over subsequent years, additional, broadly framed GAARs were introduced. These include the multinational anti-avoidance law (intended to overcome schemes that limit a taxpayer’s taxable presence in Australia) and the diverted profits tax (DPT), the objects of which include overcoming the diversion of profits offshore through contrived arrangements between related parties.

The ATO has sought to apply the DPT to pursue its well-known ‘embedded royalties’ agenda (among other things). However, in the recent PepsiCo case, Australia’s High Court decided by a slim majority (4:3) that the DPT did not apply. In that case, the ATO had alleged that a portion of an arm’s length price for concentrate sold by the PepsiCo group to an unrelated Australian bottler should have been subject to royalty withholding tax because the bottler was also provided with use of PepsiCo’s brands.

It appears that the global political landscape in relation to tax may have emboldened the ATO to expand its use of Australia’s GAARs. The ATO does not consider the GAARs provisions of last resort and there are limited checks and balances on this expansion. To the extent that the courts read down the application of a GAAR, there is political mileage for Australia’s federal government to make changes to the law widening the GAAR’s application to be seen to be ‘cracking down’ on MNE tax avoidance. In that regard, it is still too early to determine how the ATO (and Australian government) will respond to the ATO’s loss in the PepsiCo case.

It is increasingly likely that Australian taxpayers, particularly MNEs and other large and wealthy taxpayers, will be subject to ATO audit or enquiry where the potential application of a GAAR is a part or the whole of the ATO hypothesis.

Wherever a particular form of transaction or arrangement entered results in a tax outcome that is more favourable to a taxpayer than a different possible form of transaction or arrangement (not entered), there is a significant prospect that the ATO will question whether this is a scheme to which a GAAR may apply.

GAARs becoming a regular or mainstream feature of ATO audits and enquiries is problematic for taxpayers for various reasons, including those outlined below.

First, the onus is on the taxpayer to show (on the balance of probabilities) that any determination and assessment by the ATO under the GAAR is incorrect and the taxpayer’s assessment of its tax position is correct.

Second, GAARs are not ‘black letter’ law and, despite the statements from the treasurer and many court cases, their scope of application is unclear and fact dependent.

Third, more particularly, the purpose test for determining whether a GAAR applies is typically an objective assessment of purpose made by reference to legislatively specified matters. Essentially, the fiscal awareness of those entering the scheme should be an irrelevant consideration. However, there can be confusion regarding what constitutes objective and subjective purposes. Inevitably, the subjective purposes of some of those involved in a scheme may taint the thinking of decision makers in the ATO and at times even the courts.

Fourth, making an objective assessment of the various purposes of each person who entered or carried out the scheme by reference to the legislatively specified matters, and then weighing those purposes to determine for each person what their main purpose was in entering or carrying out the scheme, is a difficult exercise and can depend on the judgment of the individual decision makers involved.

Fifth, matters involving GAARs are generally excluded from Australia’s tax treaties, removing opportunities to mitigate the risk of double tax (e.g., through mutual agreement procedures).

Sixth, if the dispute needs to be publicly disclosed (including in court proceedings), there is an increased risk of adverse public opinion because the dispute will be characterised as ‘tax avoidance’ (rather than as a disagreement about the application of the tax law).

Lastly, increased tax rates and penalties can apply, and there may be administrative or procedural restrictions (e.g., limitations on the taxpayer’s ability to adduce evidence in litigation).

These problematic features of matters involving GAARs can at times assist the ATO in positioning the audit or enquiry to result in payment of a healthy settlement sum.

It is not possible to mitigate entirely the risk of the ATO applying a GAAR. However, there are some key principles to keep in mind.

First, the tax function should never be tasked with project managing a transaction. This can be tempting because the tax function tends to pay close attention to detail and often liaises and coordinates with other key functions within the organisation (e.g., finance and legal) as part of its compliance activities. However, this can lead to the perception that the transaction is tax motivated.

Second, the structure of the transaction and analysis of potential alternative options should be developed and coordinated by the commercial team.

Third, project documents should make clear that tax is only one of many considerations.

Fourth, there should also be project material available to provide to the revenue authority that explains the transaction and its implications.

Lastly, business structures and arrangements should be reviewed periodically. Community expectations can shift over time. What was previously accepted as an ordinary business or family arrangement may now be perceived by the revenue authority as blatant, artificial or contrived tax avoidance.

There is little doubt that Australia is well ‘advanced’ in the administration of its income tax GAARs. For tax residents in a jurisdiction other than Australia, it may be worthwhile reflecting on their jurisdiction’s journey to ‘weaponising’ its GAAR and whether there are lessons that may be learnt and applied from the Australian experience.

 

Stewart Grieve is a partner and Don Spirason is a special counsel at Johnson Winter Slattery. Mr Grieve can be contacted on +61 3 8611 1353 or by email: stewart.grieve@jws.com.au. Mr Spirason can be contacted on +61 3 8611 1379 or by email: don.spirason@jws.com.au.

© Financier Worldwide

BY

Stewart Grieve and Don Spirason

Johnson Winter Slattery

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